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What happens when the stock market enters a period of volatility, as we have seen in recent weeks?
One answer is: panic. Some investors worry about what such volatility means and where it might lead. But that’s only one side of the story. Some calm investors who take a long-term approach to investing grasp the potential for stock market volatility.
Why? Doing so would mean they are buying large shares at bargain prices. In all likelihood, that can help a person retire early.
Good stocks are not immune to the markets
Maybe I should start by explaining that at the end. Stock market volatility can push a stock to a point where its value is much cheaper than a few weeks ago. Since the dividend yield is a function of the dividend that the company pays and what it pays for its shares, that would mean that its yield has gone up.
To illustrate, I will use US oil major ExxonMobil (NYSE: XOM). This venerable company has an easy dividend track record, having grown its dividend per share annually for decades. Indeed, it has always done so during the pandemic when UK rivals such as A shell he took the opportunity to cut theirs.
Currently, ExxonMobil’s yield is 2.8%. That may seem unenthusiastic by British standards. It is slightly less than the current one FTSE 100 yield of 3% and also below Shell’s yield of 3.3%.
But ExxonMobil’s share price has risen 357% from 2020 is low when the epidemic period is afraid about the reduction of oil consumption punishes it.
So the person who invested at that time will now be sitting on a large paper (or real profit).
But here’s the bottom line when it comes to early retirement: having bought at a low price, their current yield won’t be the 2.8% that ExxonMobil is offering today. It would be north of 12%.
How can downsizing help someone retire early?
For blue-chip stocks like ExxonMobil, that kind of yield is the stuff of dreams. Investing at a time when yields are at such a high level can help someone reach their financial goals for early retirement.
That assumes, of course, that the dividend is maintained. So far, in ExxonMobil’s case, it’s been (indeed, it’s been growing). But that is by no means guaranteed.
Yes, ExxonMobil has huge reserves, a proven business model and extensive sales channels around the world. But so is Shell — and, unlike ExxonMobil, it’s lowering its payout in 2020.
Using market chaos to your advantage
Exxon (like Shell) is currently riding high due to high oil prices. But there is a risk that if the price of oil falls – as it is bound to happen sooner or later – that will hurt ExxonMobil’s profits and share price.
Making the right call between risk and reward as an investor can be easy if there is a comfortable enough margin of safety. A period of volatility that significantly lowers the stock prices of certain large companies can help improve that risk/reward ratio.
But such moments can be short-lived. That’s why I waste time now to make a list of high-quality blue-chip companies that I would like to own – if I get the chance to buy them at a low price.
